Benjamin Franklin famously wrote, “In this world, nothing can be said to be certain, except death and taxes.” As an estate planning attorney with over 30 years of experience in New York, I deal with the intersection of these two certainties every single day. And I can tell you this: while death is inevitable, the taxes that follow it are often optional—if you plan correctly.
When clients come to Morgan Legal Group, they ask, “What are taxes?” They aren’t asking for a dictionary definition. They are asking: “How much of my hard-earned money will the government take from my children?”
In New York State, the answer is complex. We live in one of the most aggressive tax jurisdictions in the country. In 2026, we are facing a “perfect storm” of tax law changes, including the sunset of the federal Tax Cuts and Jobs Act (TCJA) and the persistent threat of the New York Estate Tax “Cliff.”
This cornerstone guide will redefine “taxes” for the New York resident. We will move beyond simple income tax and explore the hidden levies that destroy generational wealth: Estate Taxes, Capital Gains Taxes, and Fiduciary Income Taxes. We will explain the math, the myths, and the strategies we use to protect over 1,000 families from unnecessary financial loss.
1. The “Death Tax”: Estate Taxes Explained
The most feared tax in our field is the Estate Tax. This is a tax on your right to transfer property at your death.
The Federal Estate Tax (The 2026 Sunset)
The Federal government taxes your estate based on its total value.
Current Status: As of 2025, the exemption is historically high (over $13 million per person).
The 2026 Threat: On January 1, 2026, the current law “sunsets.” The exemption is scheduled to be cut roughly in half (projected to drop to ~$7 million, adjusted for inflation).
What This Means: A family in Queens or Long Island with a paid-off home, a robust 401(k), and life insurance could suddenly wake up in 2026 owing the IRS 40% on every dollar over the new limit.
The New York State Estate Tax (The “Cliff”)
New York is one of the few states that charges its own estate tax, separate from the IRS.
The Exemption: Approximately $6.94 million (adjusted annually for inflation).
The Cliff Trap: This is the most dangerous tax rule in New York. If your estate exceeds the exemption by more than 5%, you do not just pay tax on the overage. You pay tax on the entire estate from dollar one.
Example: If you die leaving $7.5 million, you don’t just pay tax on the excess. You pay tax on the whole $7.5 million. The bill could be over $600,000. This is why “capping” your estate through Trusts is essential.
2. The “Hidden Tax”: Capital Gains and the Step-Up in Basis
When asking “What are taxes?”, many people forget about Capital Gains. This is the tax on the profit you make when selling an asset.
What is “Step-Up in Basis”?
This is the greatest tax loophole in the tax code, and it is the reason you should be careful about gifting your home to your kids while you are alive.
Scenario A (Gift): You bought your Brooklyn brownstone in 1980 for $100,000 (your “basis”). It is now worth $2.1 million. If you give it to your son today, he takes your $100,000 basis. If he sells it, he owes Capital Gains Tax on $2 million of profit. (Approx. tax bill: $500,000+).
Scenario B (Inheritance): You keep the house until you die (or put it in a specific type of Trust). When you die, the “basis” steps up to the value at the date of your death ($2.1 million). If your son sells it the next day for $2.1 million, the profit is $0. The tax is $0.
Effective estate planning is often about managing this trade-off between avoiding Estate Tax and maximizing the Step-Up in Basis.
3. The “Gift Tax”: Giving It Away Isn’t Always Free
Clients often think, “I’ll just give everything away before I die to avoid taxes.” Not so fast.
Federal Gift Tax
The IRS links your Gift Tax exemption to your Estate Tax exemption. Every dollar you give away over the annual exclusion amount ($19,000 in 2025) reduces the amount you can pass tax-free at death.
New York’s “Clawback” Rule
New York does not have a separate Gift Tax. However, it has a “Clawback.” If you make a significant gift within three years of your death, New York “claws” that value back into your estate for the purpose of calculating estate taxes. You cannot simply sign the deed to your house over to your daughter on your deathbed to avoid the NY tax.
4. The “Probate Tax”: Fiduciary Income Taxes
While your estate is going through probate in the Surrogate’s Court, it is considered a separate taxpayer.
Your Executor must file:
- Form 1041: Income Tax Return for Estates and Trusts.
- NYS Form IT-205: New York Fiduciary Income Tax Return.
If your estate generates income (dividends, rent, interest) during the 12-18 months it takes to settle the estate, that income is taxed. Often, it is taxed at the highest marginal rate because estates hit the top tax bracket much faster than individuals. Minimizing the duration of probate is a tax-saving strategy.
5. Property Taxes: Protecting Your Exemptions
For seniors in New York, property taxes are a massive burden.
- STAR Exemption: School Tax Relief.
- SCHE: Senior Citizen Homeowners’ Exemption.
- Veterans Exemptions.
The Trust Danger: If you transfer your home into a Trust improperly, you can accidentally lose these exemptions, causing your property tax bill to double.
The Morgan Legal Approach: We draft Revocable Trusts and Medicaid Trusts with specific language that retains your “beneficial interest,” ensuring you keep your STAR and Veteran benefits for life.
6. Strategies: How We Fight Back in 2026
Understanding “what taxes are” is useless without knowing how to mitigate them. Here are the strategies we employ at Morgan Legal Group.
The Credit Shelter Trust (Bypass Trust)
For married couples, we can effectively double the exemption. Instead of leaving everything to your spouse (which piles all the assets into their estate), we put the first $6.94 million into a Trust. This money is “sheltered” from the survivor’s estate tax but available for their use.
The SLAT (Spousal Lifetime Access Trust)
With the 2026 Sunset approaching, wealthy clients are using SLATs. You make a gift to a trust for your spouse now, using the current high federal exemption. This “locks in” the ~$13M exemption before it disappears, removing the appreciation of those assets from your taxable estate forever.
The ILIT (Irrevocable Life Insurance Trust)
Life insurance is tax-free to the beneficiary, but the death benefit counts toward your taxable estate. If you have a $5 million policy, you might be over the “Cliff” without realizing it. An ILIT removes the policy from your estate entirely.
7. Conclusion: Taxes Are Optional (To a Degree)
So, what are taxes in the world of estate planning?
They are the cost of procrastination. They are the penalty for failing to plan.
The tax code is written with two paths: one for the uninformed, and one for those who seek professional counsel. In 2026, the cost of taking the wrong path could be 40% of your life’s work.
Do not let the IRS or New York State become your primary beneficiary. Schedule a consultation with our tax and estate planning experts today. We will crunch the numbers, assess your exposure to the “Cliff,” and build a plan that keeps your wealth in your family.
For the latest official tax tables and exemption amounts, please refer to the New York State Department of Taxation and Finance Estate Tax page.